Old settlers of Sikkim are entitled to income tax exemption under section 10(26AAA) of the Income Tax Act, 1961. Furthermore, journal entry adjustments used for settling payments between parties do not constitute a violation of section 269SS of the Act, and thus are not liable for penalty under section 271D.

O R D E R

Per Rajesh Kumar, AM

These are the batch of five appeals filed by the assessee arising from separate orders dated 05.06.2025 and 09.06.2025, passed u/s 250 of the Income Tax Act, 1961 (hereafter referred to as “the Act”) by the Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereafter referred to as “the Ld. CIT(A)]. Since all the appeals relating to one assessee and are involving common issues therefore, these are beings disposed of by this consolidated order for the sake of brevity and convenience.

ITA No. 1743/Kol/2025

2. Ground No. 1 is general in nature and no specific adjudication is required.

3. Ground No.2 is against the order of Ld. CIT(A) upholding the disallowance of exemption of Rs. 3,14,25,287/- by the AO rejecting the claim of the assessee u/s 10(26AAA) of the Act.

4. The facts in brief are that the assessee is an individual and filed return of income on 13.03.2022 by declaring total income at Rs. ‘Nil’. The assessee has claimed exemption of income of Rs. 3,14,25,287/- u/s 10(26AAA) of the Act. The case of the assessee was selected for scrutiny for verification of expenses and verification of suppliers who were not filer of IT returns. Accordingly, notices u/s 143(2) and 142(1) of the Act along with questionnaire were issued and duly served upon the assessee. The assessee furnished the reply on 13.07.2022 furnishing tax audit report computation of total income and Profit & Loss Account and balance sheet etc. as called for by the AO. Thereafter, the assessee complied with the direction of the AO from time to time during the assessment proceedings by furnishing all the details /information. Finally, the AO noted that the assessee has claimed Rs. 3,14,25,287/- as exempt income u/s 10(26AAA) of the Act which according to the AO was not in accordance with the three conditions specified in Explanation to Section 10(26AAA) of the Act and hence the same was rejected.

5. The Ld. CIT(A) in the appellate proceedings upheld the order of AO.

6. After hearing the rival contention and perusing the material on record, we note that the assessee is Sikkimese individual assessed as such and has been residing in the state of Sikkim. We note that the assessee is carrying on his business activity within the geographical boundaries of Sikkim, and his income arises solely from the sources situated within the state. This is undisputed that the assessee is a member of bonafide domicile old settlor of Sikkim and is also member of association of old settlers of Sikkim and has been issued certificate to this effect by the said association. The Ld. AO disallowed the claim of the assessee u/s 10(26AAA) of the Act on the ground that the assessee did not furnish a ‘Sikkim Subject Certificate’ and therefore, assessee was not entitled to this exemption u/s 10(26AAA) of the Act. We also note that the association of old settlor of Sikkim has been in litigation before the Hon’ble Supreme Court to contest for the entitlement of the benefit u/s 10(26AAA) of the Act of Old Settlers of Sikkim and Hon’ble Supreme Court in the case of Association of Old Settlers of Sikkim vs. Union of India (2023 SCC Online SC 58) struck down the earlier definition of Sikkimese in section 10(26AAA) of the Act as unconstitutional because it excluded the old settlers from its ambit by holding that such exclusion was arbitrary, discriminatory and violative of Article 14. The Hon’ble Supreme Court has held that old settlers are fully entitled to exemption u/s 10(26AAA) of the